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December 13th, 2016 by FGG


Real estate investments in income producing properties remain one of the most solid and reliable sources of building net worth. Investors have discovered that income from real estate benefits from tax advantages that are not available to other classes of investments such as stocks and bonds. Not only can somewhat higher gross returns be achieved ranging from 5% to 7%, but other key benefits can be realized including:

  • Income can be protected from taxes through depreciation and expense right-offs
  • Taxes on appreciated gains can be deferred and potentially avoided altogether though a 1031 Exchange
  • Overall returns can be turbocharged using leverage (debt)
  • Day to day volatility is lower and not as subject to market corrections
  • Real estate is a tangible asset with inherent scarcity and uniqueness

Even in dark periods such as the global financial crisis in 2008 where virtually all asset values plummeted, income from real estate investments remained positive due to tenant occupancy which remained favorable.

The NCREIF Index which measures the performance of US commercial real estate properties reported an annual return of 12.7% in 2015 which outpaced other key indexes such as the S & P 500, Dow 30, and the Russell 2000. Over the past 15 years, including the 2008 meltdown, the NCREIF Index reported an average annual return of 8.8% which is 200 basis points higher than the S & P 500 during the same period.

One of the first principles learned by all investors is the inherent trade-off between return and risk i.e., the greater the return, the greater the risk – and vice versa. With experience, however, many investors learn and apply techniques which can increase their returns without necessarily raising their risk of loss. One of the most common ways of achieving higher returns without added risk is to take advantage of existing tax laws that favor the treatment of certain types of investments over others, thereby allowing investors to keep a higher percentage of their gains.

While the US tax code contains thousands of such preferential tax advantages covering many types of investments ranging from making movies to investing in municipal debt, one of the largest remaining areas of favorable tax treatment is real estate.

The range and degree of tax advantages has declined from the high tax years of the 1980’s when real estate investments were often done even if the investment did not make a return since allowed write-offs could be taken for several times the amount of the original investment. While tax reforms have since eliminated these extreme advantages, today’s real estate investors are still allowed to significantly improve their net income utilizing depreciation of physical assets such as buildings, and deducting mortgage interest and expenses. Investors can also defer and even eliminate capital gains on the sale of their real estate assets by taking advantage of Section 1031 of the Internal Revenue Code which dates to 1921.

FGG Admin




There is no guarantee that any strategy will be successful or achieve investment objectives. All real estate investments have the potential to lose value during the life of the investments. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.